Low Rates Drag Down Corporate Pension Funding

Despite a rising stock market and enhanced employer contributions, corporate pension plan funding levels declined again in 2012, leaving most plans significantly underfunded, according to an analysis on Wednesday from Towers Watson.

In a review of the 429 largest U.S. companies that sponsor defined benefit plans, corporate pensions were only 75% funded in aggregate, down from 78% in 2011. Though pension assets performed better during the year, it wasn’t enough to offset the increase in liabilities stemming from low interest rates used to calculate outstanding pension obligations.

“Interest rates that are used to measure pension obligations were pretty low at the end of 2011 and many thought they were as low as they were going to get, but they went down even further in 2012,” Alan Glickstein, a senior retirement consultant at Towers Watson, told CFO Journal. “The discount rate outweighed the other factors in a year where you would normally think there should be good news for pension funding,” he added.

Pension plan assets actually increased by an estimated 4% in 2012 to $1.26 trillion, from $1.22 trillion at the end of 2011, according to Towers Watson. Exact figures won’t be available until the spring when companies have filed their annual reports.

Though some CFOs may consider the interest rates affecting pension plans artificially low, the apparent underfunding of the plans could affect decisions about how much corporations contribute to the plans in 2013 and will boost corporate premiums to the Pension Benefit Guaranty Corp., the government’s pension insurer, Mr. Glickstein said.

“Under the transportation bill passed this summer, that premium is doubling over the next few years and it is assessed against the funded status based on current interest rates,” Mr. Glickstein said.

Comments (5 of 6)

Please no more pensions for public employees. As a taxpayer, I can no longer afford it. Big payouts over many many yrs of retirement is too costly. 401k's for all.

8:56 pm January 2, 2013

Cookie Jar Time wrote:

Many of these companies are overly optimistic on estimating their return on assets, which masks the underfunding a bit. In response to this trend, many Fortune 100 companies are now adopting non-gaap disclosures for EPS which exclude non-service cost items from the EPS computations. FASB by now should realize the pension gaap model is wholly broken and they along with the IASB should adopt a new standard that makes sense because all this non-gaap disclsoure is now over the top (go look at Ford or IBM for example).

8:30 pm January 2, 2013

ionbond.blogspot.com wrote:

In order for pension funds to generate the returns needed to support their liabilities it will be necessary for their managers to expand their asset allocation models. The standard menu items are insufficient in offerings and expected returns. From a fixed income standpoint, high yield corporates and emerging market debts are now a much needed part of a portfolio....as is the research necessary to included these positions.

5:47 pm January 2, 2013

bigxav wrote:

that's what happens when there is no growth in the economy. I would think it is about time that the leadership of the country addressed this issue on a priority basis.

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